How to make Christmas tax deductible and keep HMRC happy

The season of goodwill is upon us. Many business owners will be ‘splashing out’ on gifts, parties, awards and other kind gestures to end the year on a high. Tax Guys CEO Jonathan Amponsah CTA FCCA, gives the lowdown on nine ways to reduce your tax bill this festive season while adhering to the tax code

1. £5,000 tax free award?

As the end of year draws to a close and with the festive mood, you might decide to award some staff members for their outstanding contribution to your business and for going beyond the call of duty.

Did you know you can pay staff tax free income for suggestions that benefit the business? Yes, you can. And there are two kinds of awards:

  • encouragement awards - for good suggestions, or to reward your employees for special effort; and
  • financial benefit awards - for suggestions that will save or make your business money.

Encouragement awards are tax free up to £25. But financial benefit awards are exempt up to £5,000. That’s right £5,000.

But before you go ahead and pay your staff tax free income this Christmas, please note that as with all tax reliefs and tax exemptions, there are conditions to meet.

Some of the conditions for staff suggestion scheme includes:

  • the suggestion scheme must be open to all your employees;
  • the suggestion must relate your business;
  • your employee must go beyond their call of duty (ie, suggestions made as part of their normal work will not count); and
  • the suggestion cannot be made at a meeting for proposing new ideas.

And to keep HMRC happy, have a look at the HMRC guidance at gov.uk. Here’s the reference for the relevant manual, EIM06600. If you don’t qualify, then it’s certainly something to think about in the new year.

2. Tax free gifts to employees

In addition to awards, gifts you give to your employees are normally exempt from tax and national insurance contributions (NICs). However, this exemption only applies if the gift is deemed to be trivial.

For a gift to be considered a trivial benefit, it must cost £50 or less, and not be part of the employees’ contract or a reward for performance.

It must also not be a cash reward as HMRC will tax this as earnings (payroll tax).

So classic gifts, including a bottle of wine or box of chocolates, would be exempt from tax.

3. Tax free business gifts to customers

These are only allowable as a tax deduction if the total cost to each customer per year is less than £50 and the gift bears a conspicuous advert for the business and it isn’t food, drink, tobacco (unless they are samples of your products).

4. Tax efficient vouchers

If you give your employees cash vouchers, the amounts would need to be put through the payroll and be subject to tax and NICs. Non-cash vouchers up to £50 may be exempt under the trivial benefit rules.

Where the voucher exceeds £50, these must be report on a P11D form to HMRC.

5. Tax free Christmas parties

It seems to be common knowledge that an employer can spend up to £150 per head including VAT per year, in providing annual social functions to entertain staff.

But here are some points to bear in mind. This £150 is per head and not per staff member. To work out the cost per head, divide the total cost by the number of attendees (staff and any other guests).

When employees’ spouses and partners attend the event you can budget for £300 per couple. The £150 is not an allowance. It’s an exemption and so if the cost per head works out at £151, then the full £151 is taxable and not just the £1 excess.

So, do watch out for attendees dropping out last minute as this could spoil the ‘tax party’ for you and your staff.

Thinking of having two parties during the year? Let’s say the first party is budgeted at £145 per head. The second party will cost £100 per head. The £150 limit can be used against the first party leaving the second party as a fully taxable benefit.

To keep HMRC happy, ensure that the annual event is a staff social event and open to all staff. Plus, do keep proper records especially on the number of attendees. For more information, search for EIM21690 on HMRC’s site.

6. Tax efficient client entertainment

Ok, so you’ve read somewhere or been told by your accountant that client entertainment is not tax deductible. And this is true. But bear in mind that if you happen to entertain clients this Christmas and you meet any of the following two conditions, you can claim these expenses against your tax. These are the so-called exceptions to the rules.

Contractual obligation: Where it’s part of your business to entertain, say if you’re providing a training course to businesses and you entertain them as part of the course – maybe providing tea, coffee, lunch and so on – even if it’s food, you’re still allowed to claim that because you’re under a contractual obligation to give them food.

Quid pro quo:  Say you’re a freelance journalist and you want to speak to say X, a contact who has a world of experience on a topic you’re writing about. You offer to take them out to lunch this Christmas in exchange for insight into the topic you’re researching. Because the contact is coming to the table with something of value, but not benefitting from it apart from getting free lunch, you are actually allowed to claim the expense, even though it appears as entertainment. In order to keep HMRC happy, do have plenty of evidence to support your claim.

7. Inheritance tax free gift

Gifts between family members are normally dealt with under the inheritance tax (IHT) code subject to the various reliefs and the seven-year rule.

This rule, also called PET (Potentially Exempt Transfer), says that if you make a gift and then survive for seven years afterwards, the gift becomes exempt (ie, no tax is payable) and therefore falls outside of your estate for tax purposes.

Luckily, the IHT code has some pretty generous reliefs and exemptions, including an annual exemption of £3,000 and a small gift exemption of up to £250 a year.

8. Christmas and tax incentives

According to a recent study by Gallup, about 60% of employees are not engaged in the work they are doing in the workplace – they are ‘dialling it in’. This is not good news for most employers.

However, most employees do look forward to Christmas. Why not capture this mood and announce some good staff retention and performance incentives at Christmas?

Consider things like tax efficient share option schemes if appropriate or tax efficient remuneration packages. How about a Christmas shopping half day off? This may well save you some recruitment costs in the New Year.   

9. Up to £1,000 long service award

Let’s say you have an employee who has been at your organisation for a very long time. It is time for them to move on and will leave in December. Did you know you can give them a non-cash award of up to £1,000 if certain conditions apply? Search HMRC’s site for ‘long service award’ for more details.

Bonus tip/conclusion

If you’re reading this and thinking you’ve missed out on some tax deductible Christmas expenses, the only way to ensure you get all the tax deductions is to plan ahead for 2019. With good advice from your accountant or tax adviser you’ll get plans in place now and get the best from tax deductions in the year ahead.

About the author

Jonathan Amponsah CTA FCCA is a chartered tax adviser and accountant, and the CEO of The Tax Guys.  www.thetaxguys.co.uk

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